So what does a Mechanics lien have to do with construction? Aren’t mechanics supposed to only work on cars? Well, if you go back into the original definitions and history books, the term mechanic was originally used to define a person who performed work with their hands, or the modern day equivalent of a builder or trade person. The mechanics lien was first created in North America by Thomas Jefferson and was a type of Financial Engineering that would encourage building, conceived as a form of capital injection for the economy. A lien would allow a landowner to use his land as security for improvements. For example, if a landowner hired a builder to construct a barn, the builder knew that he would have security in the land and was more likely to take on the work instead of passing it off as too risky. [i]
Overtime the Mechanic’s Lien has evolved. In a construction project, you are probably most familiar with the Mechanic’s Lien Holdback. If a contractor, sub-contractor, other subs or material supplier are not paid they have the right to file a lien against the property where the project was performed, and recoup their money from the sale of the property. Most often, if there is a lien against a property re-financing or sale of the property is difficult without the owner first paying out the liens.
One caveat to be aware of is that Crown, Government or Aboriginal lands can not have liens placed against them. So in these cases one often sees a Labour and Material payment bond that provides suppliers and sub-contractors with a right to make a claim under the bond.
The amount of the holdback will vary according to the province or state that you are practising in and can vary from 5% – 15% of the value of the work. Do not confuse a lien holdback with other types of holdbacks. A lien holdback can not be used as a holdback for deficiencies. The key difference with the Mechanic’s lien holdback is that upon declaration of Substantial performance the clock starts ticking and after a certain time regardless of deficiencies the lien holdback is released to the contractor. Once the project is substantially performed, and within the applicable time limits set by jurisdictions 40 – 60 days, all liens have to be filed, and the money can be released to the contractor if all bills have been paid.
Hence the importance of the architect’s certification of substantial performance, or of final completion. In some jurisdictions substantial performance is defined using the 3-2-1 formula. A project is considered substantially complete if the project can be completed at a cost of no more than:
- 3% of the first $500,000 of the contract price
- 2% of the next $500,000 of the contract price, and
- 1% of the balance of the contract price
Depending on the contract documents, a contractor is usually required to submit a statutory declaration with each application for payment that states:
“…all accounts for labour, subcontracts, products, construction equipment, and other indebtedness which may have been incurred by the contractor in substantial performance of the work and for which the owner might in any way be held responsible have been paid in full, except for amounts properly retained as a holdback or as an identified dispute.” CCDC 9a Statutory Declaration
There is also a similar procedure and form that can be used by a contractor to declare that the sub-contractor has paid his suppliers and sub-contractors (CCDC 9b). The intent of these forms is to protect the owner of a project from having to pay twice for a service. For example, if the contractor has declared that the painter has been paid, then the owner should no longer be on the hook for payment to the painter if the contractor fails to for whatever reason.
In some contracts a progressive release of the lien holdback is permitted if the work of the sub-contractor is substantially performed. For example the work of a concrete foundation that is 100% completed at the start of the project.
This has been a short overview of the mechanic’s lien holdback, and it would probably in your best interest to download a copy of the local lien legislation and take a couple of minutes to review and familiarize yourself with it, along with the provisions in any of your contracts if you haven’t already.
Most of all don’t forget that you as a consultant have the same recourse to filing a lien against a project as any sub-contractor in the event that you don’t get paid!
[i] A Practitioner’s Guide to Construction Law, John G. Cameron, Jr., 2000, American Law Institute-American Bar Association Committee on Continuing Professional Education